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Investment View

Jargon is a fact of life but it can be a barrier to understanding. Most occupations have their vocabularies of jargon. In the case of information technology, its terminology is fast becoming part of everyday language.

In the investment world, there remain plenty of impenetrable phrases which make sense only to those in the know. A new one crossed my desk the other day. It was “window undressing”. Like much, but by no means all, investment jargon, it originated in the US. The term applies to the practice of fund managers dumping unsuccessful investments before a review date. Thus, a fund manager might sell technology stocks on which there is a big loss immediately ahead of a quarterly review period so they do not appear on the portfolio valuation. Do fund managers really resort to such subterfuge? I very much fear they do.

December was always an interesting month in stockmarkets because of the way in which fund managers adjusted portfolios to ensure the best appearance for their trustees or investors. It was one of the reasons why shares tended to rise during the last month of the year. Since markets usually finish the year higher than when they began, it was necessary to ensure that not too much cash appeared in your balance sheet when you reached the year end. It has been comparatively rare for fund managers to have to conceal unsuccessful investments. Inaction was usually the most important area of obfuscation.

This year, most fund managers, particularly in the US, enter the second quarter having little idea of what is in prospect. Consumer confidence in the US has taken a dive. No surprises there, given the scale of the losses in new economy stocks. It is estimated that around 56 per cent of the Nasdaq market is owned by private investors. There are so many noughts at the end of the value written off this market over the past year that you cannot help but wonder what effect this may have on the real economy.

We are now in a situation where interest rates have fallen significantly in the US, are expected to trade lower in the UK but remain stubbornly fixed in the euro zone. True, they have the lowest interest rates of the three of us, even after the reductions announced by the Federal Reserve Bank, but it is surprising that the European Central Bank has not been more robust in its reaction to what is happening in the US. I know inflation is above target level in Europe and that not every economy is seeing a slowdown but anyone who believes that Europe can shrug off the effects of slower growth in the US must be living on a different planet.

Perhaps what was most interesting was the reaction of the euro when the ECB&#39s lack of action was announced last week. Higher interest rates generally strengthen the currency but not so in Europe. Many believe that a cut would have boosted the value of this beleaguered currency rather than propel it to its lowest level ever against the dollar. It seems that currency investors believe Mr Duisenberg and his colleagues do not fully understand the problem.

I am refusing to be budged from my positive perch although I foresee a period of lengthy introspection while we try to come to terms with how equity markets might behave in the future. The growing professionalism of the investment management market should not be underestimated. This is as dynamic an industry as you are ever likely to find. Technological advancement ensures we react more swiftly to events these days. More efficient delivery systems and cheaper management charges will help investors but in the end it is economic growth we really need. In the year that the Indian population passed one billion, I am sure it will return.


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